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March 3, 2017

U.S. Weekly FundFlows Insight Report: Investors Inject $3.8 Billion into Funds for the Week

by Tom Roseen.

The major broad-based indices rallied to new record highs on four of the five trading days of the fund-flows week ended March 1, 2017. On Monday, February 27, investors cheered a twelfth straight record close for the Dow Jones Industrial Average, matching the longest record-setting winning streak ever (1987). The Dow then closed above the 21,000 mark on Wednesday after President Donald Trump addressed the joint session of Congress. Despite learning that the Federal Open Market Committee leaders believe the economy is near to being able to withstand some monetary tightening, investors warmed to relatively strong economic news during the week. Although the ten-year Treasury yield declined in the middle of the flows week, its rise on Wednesday benefitted financial stocks, with investors betting that greater deregulation—along with a rising-interest-rate environment—will be an advantage for banks and related stocks.

For the sixth consecutive week fund investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting $3.8 billion. While investors were net redeemers of money market funds (-$5.9 billion) and municipal bond funds (-$0.3 billion), they were net purchasers of equity funds (+$7.3 billion) and taxable bond funds (+$2.8 billion).

Shrugging off news at the beginning of the fund-flows week that the number of U.S. workers applying for unemployment benefits rose slightly the prior week, investors pushed the prices of some commodities higher after data showed that crude inventories had risen at a slower pace than expected and that gold prices posted their highest close in three months. However, the very next day oil prices and energy stocks were hurt by the strengthening dollar and data showing an uptick in the U.S. rig count. Financial stocks took a drubbing on Friday as well when the ten-year yield declined 7 basis points for the day; however, the market rally was kept on track after reports that new home sales rose 3.7% for January. On Monday, February 27, all the broad-based U.S. indices fared well, with the Dow’s winning streak extending to its twelfth consecutive record close as investors learned that durable goods orders had climbed 1.8% for January—helped almost exclusively by a spike in commercial and military plane orders. However, on Tuesday, investors took their feet off the pedal ahead of Trump’s address to the joint session of Congress slated for Tuesday evening, snapping the Dow’s winning streak. Even though investors learned that consumer spending had rebounded for fourth quarter 2016, that consumer confidence rose to its highest level in 15 years, and that the major equity indices posted strong monthly gains for February, they remained cautious ahead of Trump’s speech. They appeared to cheer Trump’s conciliatory tone during his address, despite a lack of details on his economic plans, sending the Dow to its highest close ever of 21,115.55 on the last trading day of the flows week.

For the fifth week in a row equity ETFs witnessed net inflows, attracting just a little under $8.6 billion for the flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$7.9 billion), injecting money into the group for the third consecutive week. For the tenth week running nondomestic equity ETFs also witnessed net inflows, this past week attracting $0.7 billion. SPDR S&P 500 ETF (+$4.6 billion), PowerShares QQQ Trust 1 (+$1.0 billion), and Consumer Staples Select Sector SPDR ETF (+$0.5 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum Financial Select Sector SPDR ETF (-$517 million) experienced the largest individual net redemptions, and iShares Russell 2000 ETF (-$484 million) suffered the second largest net redemptions for the week.

For the third consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $1.3 billion. Domestic equity funds, handing back a little less than $1.4 billion, witnessed their ninth week of net outflows, despite posting a 1.04% return on average for the flows week. Meanwhile, their nondomestic equity fund counterparts, posting a 0.31% return on average for the week, witnessed net inflows (although only +$47 million) for a fourth consecutive week. On the domestic equity side fund investors continued to lighten up on large-cap funds (-$0.9 billion net), while on the nondomestic side they favored international equity funds (+$0.4 billion).

For the ninth week in a row taxable bond funds (ex-ETFs) witnessed net inflows, attracting $1.2 billion. Corporate investment-grade debt funds witnessed the largest net inflows of the group, taking in $1.6 billion, while Treasury funds (+$262 million) and corporate high-quality debt funds witnessed the next largest net inflows (+$21 million). U.S. mortgage funds (-$331 million) and flexible funds (-$313 million) witnessed the largest net redemptions of the group for the week. With New York Fed President William Dudley stating that a U.S. interest rate increase has become much more compelling, it wasn’t too surprising to see Lipper’s Inflation-Protected Bond Funds classification taking in money for the seventeenth consecutive week (+$123 million) and bank loan funds witnessing their sixteenth week of net inflows, attracting some $525 million for the week. However, for the first week in eight municipal bond funds (ex-ETFs) witnessed net outflows, handing back some $241 million for the week, as investors contemplated the impact a reduction in income taxes and corporate taxes might have on municipal bond demand.

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